In the past six months, we’ve seen four rate hikes by the People’s Bank of China (PBOC), and rather than continuing to decline as everyone had expected, Chinese A-Share stocks are now rallying. What gives?
Well, I think the stock market feels that the end of the PBOC rate hikes is near. The Chinese economy had been growing at an unsustainable pace — an alarming 11.9% in the first quarter of 2010 — so the monetary tightening that came in the form of short-term rate hikes, reserve requirement increases, and lending quota cuts was to be expected.
This naturally caused mainland Chinese equity indexes to underperform, as the tightening applies extra pressure on financial stocks and property developers. Yet even with those actions, there is still no evidence of the crash in the Chinese commercial and residential property markets that had been feared by bears in the camp of Jim Chanos and the like. Read